| Neogen Chemicals Limited | ||||||
| Ratings reaffirmed at 'CRISIL A-/Stable/CRISIL A2+' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings on the bank facilities of Neogen Chemicals Limited (NCL) continue to reflect an established market position in the specialty chemical segment, healthy operating efficiency, and an improved financial risk profile. These strengths are partially offset by large working capital requirement, exposure to foreign exchange volatility and to changes in government regulations
CRISIL had, on January 25th, 2021, upgraded its ratings on the bank facilities of NCL to ‘CRISIL A-/Stable/CRISIL A2+’ from CRISIL BBB+/Positive/CRISIL A2’.
The rating upgrade reflected improvement in business risk profile, driven by improved scale of operations and sustained operating margin. Revenue grew by 28% in fiscal 2020 and likely to improve by 10-11% in fiscal 2021, despite pandemic related disruptions. Backed by further enhancement in capacities, addition of new customers and molecules; revenue is expected to further grow significantly in fiscal 2022 with sustained operating margins. Rating upgrade also reflect an improved financial risk profile due to decline in leverage levels backed by equity infusion in fiscal 2020 and comfortable debt protection metrics, expected to remain healthy over the medium term despite debt funded capex |
Key Rating Drivers & Detailed Description Strengths
The extensive experience of the promoter and the proven track record in developing bromine and lithium derivatives continues to support the business risk profile. Research and development initiatives have enabled the shift in focus to more niche, high value-added products, from bulk bromine-based compounds in the 1990s. Constant efforts to control the cost of production per unit have helped maintain a healthy operating margin, despite the increasing competition. Capacity enhancement in the organic chemical segment (incremental capacity of 1,26,000 litres) is expected to commence in the last quarter of fiscal 2021 and further capex of Rs 55-60 crore planned in fiscal 2022. Company has also roped in new customers in the custom synthesis segment and new products are also being introduced, driving revenue over medium term strengthening business risk profile
The networth and total outside liabilities to adjusted networth (TOLANW) ratio improved to Rs 156.4 crores and 1.3 times respectively as on March 31st 2020 (Rs 69 crore and 2.6 times, respectively, as on March 31, 2019). The Rs 70 crore of equity raised in May 2019 through an IPO were utilised to reduce existing term debt and to partly fund working capital requirements, thereby strengthening the capital structure. While the absolute debt level is expected to increase to around 200 crore due to the debt-funded capex and incremental working capital financing, TOLANW ratio is expected to be sustained at around 1.3-1.4 times over the medium term despite debt funded capex of around Rs 80-85 crores and Rs 55-60 crores in fiscal 2021 and 2022 respectively.
Debt protection metrics were above average, with interest coverage and net cash accrual to total debt ratios of 4.9 times and 0.2 times in fiscal 2020 (3.7 times and 0.2 time, respectively, in fiscal 2019), and are expected to be sustained over medium term.
Weaknesses
GCAs were 274 days as on March 31, 2020 (240 days as on March 31, 2019), driven by debtors and inventory of 82 days and 191 days, respectively. Receivables cycle is driven by credit of up to 90 days and 120 days is provided to domestic and global customers, respectively. Inventory level as on March 31 2020 were higher than normal due to loss of sales on account of lockdown related disruptions. A large product portfolio (over 198 products) and lead time involved in import of raw materials drive the inventory cycle, which is likely to remain at 120-135 days over the medium term. The overall working capital cycle is expected to improve over the medium term with GCAs of around 220-240 days over the medium term
NCL derives around 45-50% of its revenue from exports to multiple geographies and hence exposed volatility in foreign exchange rates. However, the risk is partially mitigated by imports of around 45-50% providing a natural hedge and monthly price reset arrangements with its customers to pass though foreign exchange movements. Bromine, being a corrosive and hazardous material, is subject to environmental and other government regulations, any adverse change in these regulations, in any of the markets it operates, could impact the business risk profile of the company. |
Net cash accruals (NCA) were Rs.29.7 crore in fiscal 2020, adequate to meet debt obligations of Rs 4.2 crores. NCA is expected to improve to Rs.40-55 crore over the medium term against debt obligation in the range of 12-19 crore per fiscal over the medium term. Average utilisation of bank lines has been moderate at 65.2% over the past 12 months ended in December 2020. Capex of Rs 80-85 crore in fiscal 2021 is adequately funded by term debt of Rs 50-55 crores and internal cash accruals. Improved capital structure has strengthened its financial flexibility and NCL should be able to enhance its working capital limits to fund growth, if required. |
Outlook: Stable CRISIL Ratings believes the business risk profile is expected to benefit from its established market position, enhanced capacities and new products & customers being introduced |
Rating Sensitivity Factors: Upward Factors:
Downward Factors:
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About the Company NCL was incorporated in 1991, promoted by Mr Haridas Kanani. The company manufactures bromine and lithium-based organic and organo-metallic compounds, used in the pharmaceutical, agricultural chemicals, and engineering industries. The manufacturing units are at Mahape in Navi Mumbai, Maharashtra, and Vadodara in Gujarat. The company made an IPO in May 2019 and is currently listed on the Bombay Stock Exchange and the National Stock Exchange |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||
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